NZ DOLLAR OUTLOOK: Kiwi may weaken ahead of RBNZ review

Tuesday 23rd October 2012

The New Zealand dollar may fall this week, rounding out the quietest month in at least a year, amid expectations the new Reserve Bank governor will keep rates unchanged or even hint at cuts in his debut review of monetary policy.

The kiwi dollar recently traded at 81.75 US cents and may trade as low as 80.80 US cents this week, based on a BusinessDesk survey of six strategists. The survey puts the trading range as wide as 80.80 cents to 82.50 cents.

So far in October, the kiwi dollar has moved about 2.5 percent compared to an average in the past 15 months of about 6 percent, meaning it is a quiet month, according to Rankin Treasury Advisory figures.

RBNZ governor Graeme Wheeler will keep the official cash rate at 2.5 percent on Thursday, according to all 15 economists in a Reuters survey, though traders says there's an outside chance of a cut and see at least a quarter point reduction in the next 12 months. The OCR has been at a record low 2.5 [percent since March last year and low rates tend to sap demand for a nation's currency.

"On balance he should be cutting interest rates (but) more than likely the Reserve Bank will sit tight," said Derek Rankin, director of Rankin Treasury. Still, Wheeler "is completely new. We do not know how he thinks."

The RBNZ review of interest rates is only one of this week's risk events. Third quarter consumer prices are due out in Australia tomorrow, with the quarterly rate seen accelerating to 1.1 percent from 0.5 percent, for an annual pace of 1.6 percent. The trimmed mean rate the central bank watches is seen rising to 0.6 percent from 0.5 percent.

The kiwi dollar recently traded at 79.09 Australian cents and has fallen from as much as 80.81 cents on Oct. 2.

The weaker path of the Australian economy is one of the factors being weighed by traders seeing hints of a rate cut by Wheeler this week - a slowdown in New Zealand's biggest export market and "a still elevated kiwi," said Imre Speizer, market strategist at Westpac Banking Corp.

Traders will also be watching for the Federal Open Market Committee meeting on Thursday in the US, Speizer said. While it may be "a dull affair" after the previous meeting where QE3 was flagged, there is a chance the Fed will give a clue to what happens when its Operation Twist ends this year, where it buys longer-term bonds and sells shorter dated securities.

One possibility was that it moves to buying Treasuries outright, which would be "positive for risk and the kiwi dollar" though Speizer says that's only a minority chance.

Traders are also mulling the possibility that Spain seeks a bailout from the European Central Bank, triggering its bond buying programme.

Mike Jones, strategist at Bank of New Zealand, said another key data release will be the unofficial HSBC PMI for China, which will provide the latest clue to the strength of the second largest market for New Zealand goods and the biggest for Australian resources.

"If (the PMI) is underwhelming the kiwi and the aussie could have a decent shakeout," Jones said, referring to New Zealand and Australian dollars colloquially.

BusinessDesk.co.nz

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